Treasury, stocks gain, both watching cliff talks

DeborahLevine

SAN FRANCISCO (MarketWatch) — Treasury prices rose on Thursday, pushing yields to their lowest in more than two weeks amid unease about how much of a compromise the White House and Congress will be able to reach to avoid the full impact of the tax and spending measures known as the fiscal cliff.

“It’s a slow grind lower in yields,” said Kevin Flanagan, chief fixed income strategist at Morgan Stanley Wealth Management. “The bond markets are looking at signs that we’re going right off the cliff, or mostly off it.”

Yields on 10-year notes
US:10_YEAR
which move inversely to prices, fell 1 basis point to 1.58%, their lowest in more than two weeks. A basis point is one one-hundredth of a percentage point.

Mac production coming to U.S.

(2:48)

Apple CEO Tim Cook said the company will produce one of its existing lines of Mac computers in the U.S. next year. Photo: AP.

Five-year yields
US:5_YEAR
slipped 1 basis point to 0.60%, also their lowest in more than two weeks.

To some extent, bonds and stocks tick up or down on any given day depending on whether leading politicians indicate progress is being made or they’ve hit a wall. Lately, both the White House and Congressional Republicans seem to be digging in their heels on tax rates for high-income earners.

The chance that no resolution will be found by year-end is now around 75% to 80%, said Andrew Brenner, head of international fixed income at National Alliance Securities.

But here’s the thing: “I think we’re going over the fiscal cliff but it won’t be as bad as people think.”

That could explain why both U.S. stocks and Treasury bonds have managed to rise in recent weeks.

The conventional wisdom is stocks tend to rally if the outlook looks better, and the country isn’t going to be plunged back into a recession. And bonds should tend to do better if investors are more worried about the outlook, because more uncertainty or lower (or declining) growth increases the appeal of bonds as a safer alternative.

But with more discussion of what will or won’t happen if this year ends without a deal, markets may be becoming more sanguine about the idea that Washington will come up with just enough of a deal to satisfy stock traders, likely including deferring most decision for several months, but still leave enough uncertainty and create headwinds to growth to satisfy bond traders. Read: Stocks swing up and down on fiscal cliff watch.

“More investors seem to be getting their heads around the notion that failure to agree by Jan. 1 will not deliver the worst possible case of imminent recession,” said Andrew Wilkinson, chief economic strategist at Miller Tabak. “Few see outright economic Armageddon just because political posturing delays broader reform.”

“We’ve got a broad view of things and fret that incomes in the first quarter will go down one way or the other and so the initial relief will prove limited,” said David Ader, head of government bond strategy at CRT Capital Group.

The move lower in rates has come even as U.S. economic data have come in a little more positive, including a jobless-claims report Thursday and a services-sector index on Wednesday. Read: U.S. jobless claims drop to 370,000.

“There’s still a belief that the U.S. economy is improving and once we get uncertainty out of the way, the U.S. economy is in better shape than Europe” and lots of other countries, which is supporting equities, National Alliance’s Brenner said.

He and other noted long-term trends like rising domestic energy resources are also likely to boost the economy longer-term.

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